Loan Market Slump Forces Companies to Hold Off Debt Refinancing

Leveraged loans erased 77 percent of this year’s gains in a monthlong drop, causing companies to sideline proposed refinancing transactions that would rely on institutional investors.

Fidelity National Information Services Inc., the payment services provider that rejected a $15 billion takeover bid by Blackstone Group LP-led private equity investors, initiated talks to extend existing loans this week as it waits to sell as much as $3.4 billion of notes and loans for a leveraged recapitalization, according to people familiar with the talks.

High-yield, high-risk loan returns for 2010 dropped to 1.37 percent as of yesterday from a peak of 5.82 percent on April 26, according to the S&P/LSTA US Leveraged Loan 100 Index, amid a European sovereign-debt crisis that threatens to derail economic recovery in the U.S. Speculative-grade companies face a maturity wall of $901.4 billion in debt due through 2015 as borrowing costs in the loan market are edging higher.

“An issuer that needs to refinance a deal maturing in 2013-2014 doesn’t feel pressured to do anything right now; they can take their time and wait for the market to settle down,” Douglas Antonacci, head of primary loan sales at Bank of America Corp., said in a telephone interview. “The degree of certainty you have around getting a deal done is entirely driven by price, and if you’re not a price taker why would you do a deal now?”

Junk-rated borrowers have $394.8 billion of loans and $324.4 billion of bonds maturing between now and 2014, according to Bank of America Merrill Lynch data. The portion of the debt due before 2013 is $188.2 billion, the data show.

High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.

Higher Risk

Borrowing costs in leveraged loans jumped 32 basis points, or 0.32 percentage point, to 478 basis points more than the three-month London interbank offered rate this week, according to S&P’s Leveraged Commentary and Data. Libor is the rate banks charge to lend to each other. The spread, implied by bids on the 15 most actively traded loans, had been dropping from 483 basis points on May 20, the 2010 high.

“As the market is moving in a less certain direction, the buy-side gets better terms and pricing because there’s higher risk to be compensated for,” Chris Shepard, head of capital markets at Imperial Capital LLC, said in a telephone interview from the investment bank’s Los Angeles headquarters.

The S&P/LSTA 100 dropped 4.5 cents, or 4.8 percent, from its April high to 88.4 cents on the dollar as of yesterday. The index returned a record 52.2 percent last year and during 2010 extended gains every month except February, when Greece’s finances first roiled markets, and in May as European governments hammered out a 750 billion-euro ($910 billion) rescue package to address its sovereign debt crisis.

Fed Rates

Federal Reserve Chairman Ben S. Bernanke said in June 9 congressional testimony that the recovery, while sustained by private demand, isn’t as strong as he prefers and faces risks from Europe’s debt crisis that may require further central bank action.

Record-low inflation and prolonged unemployment mean the Federal Reserve will hold off raising interest rates until 2011, according to economists surveyed by Bloomberg News. The federal funds rate for overnight loans among banks has been at a record low range of zero to 0.25 percent since December 2008.

Banks ramped up loan sales as the Fed kept its lending benchmark at a historic low. Institutional investors bought $55.2 billion of leveraged loans this year, compared with $38.3 billion in all of 2009, JPMorgan Chase & Co. analysts led by Peter Acciavatti in New York said in a June 4 report.

Calpine Rises

Almost 63 percent of the loans sold this year to non-bank lenders such as collateralized loan obligations, bank-loan mutual funds and hedge funds were used for refinancing or recapitalization, according to a June 4 report from Barclays Capital, the investment banking division of Barclays Plc.

Companies used 25 percent of the proceeds for acquisitions and leveraged buyouts, while bankruptcy exits made up 10 percent, credit strategists led by Bradley Rogoff in New York said in the report. Banks are currently arranging $20 billion of high-yield loans, two-thirds of which will be used for acquisitions or LBOs, the strategists said.

Calpine Corp.’s $1.3 billion term loan backing the largest U.S. natural gas-fueled electricity generator’s acquisition of Pepco Holding Inc.’s wholesale electricity plants rose after it started trading this week. TransUnion LLC’s $950 million term loan backing Madison Dearborn Partners LLC’s purchase of a majority stake in the company also climbed in initial trading.

Both companies increased pricing on their term loans before completing transactions.

‘Right Price’

“What we’ve seen is loan pricing flex out to wider levels, it’s not as though these deals are being launched and not getting done,” John Fenn, a credit market analyst at Citigroup Inc., said in a telephone interview from New York. “In many cases it’s a matter of finding the right price.”

JPMorgan and Bank of America are leading discussions with lenders to amend Fidelity National’s existing credit facilities, said people familiar with the negotiations who declined to be identified because the terms are private. The Jacksonville, Florida-based payment services company initiated talks this week to extend portions of a revolving credit line and a term loan, the people said.

Lenders are being offered a 100 basis-point increase in the interest rate to 2.5 percentage points more than Libor, as well as a 50 basis-point approval fee and a 100 basis-point fee on additional commitments, two of the people said.

Fidelity National also seeks permission to issue as much as $3.4 billion of debt in unsecured notes and term loans, which would be used to back its recapitalization plan, the people said. Lender responses are due June 22.

Beyond 2011

Cedar Fair LP, the operator of amusement parks that called off a takeover by an Apollo Management LP affiliate in April, is also among companies seeking to borrow and refinance debt. The Sandusky, Ohio-based company set initial pricing guidance on a $1.05 billion term loan last month. Neither its proposed bank debt nor its planned $500 million of senior unsecured notes sale have been completed.

“Nobody really needs to be coming to the market right now because largely everybody’s need is refinancing, and those deals have been more opportunistic than maturity-driven,” Citigroup’s Fenn said. “The refinancing risk through 2011 is fairly well managed, it’s the debt beyond that that raises concern.”

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